Thursday 8 December 2016

Europe is now assessing Reit tax regime complaint

Published 27/10/2016 | 02:30

The European Council says the CAP needs to continue to ensure viable food production and a stable food supply, while taking into account food safety, the rural economy, animal welfare, and social and environmental concerns
The European Council says the CAP needs to continue to ensure viable food production and a stable food supply, while taking into account food safety, the rural economy, animal welfare, and social and environmental concerns

The Irish commercial real estate sector is facing fresh uncertainty with confirmation from the European Commission that it is assessing a complaint in relation to the tax regime used by Ireland's Real Estate Investment Trusts (Reits).

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The Irish Independent has learned the commission's directorate general for competition wrote to the complainant, the Independent TD Mick Wallace, last Friday to inform him that information he had provided "as regards the Irish tax regime of Reits is currently under assessment".

News of the European Commission's decision to assess the Wexford politician's complaint comes just one week after the Government confirmed its intentions in the Finance Bill to introduce a withholding tax of 20pc on distributions from Irish assets held by predominantly international investors in vehicles such as Qualifying Investor Alternative Investment Funds (QIAIFs) and Irish Collective Assetmanagement Vehicles (ICAVs).

The proposed new tax - the introduction of which has been met with a frosty reception by the commercial real estate sector - is to apply to vehicles classed as Irish Real Estate Funds (IREFs), where 25pc or more of their value is made up of real estate assets. The tax is to be calculated on rental profits and gains from trading or development. Gains on disposal of assets held for at least five years will not be subject to the tax.

While the property industry has drawn a degree of comfort from the fact that the Finance Bill did not propose any changes to the tax treatment of Reits, that decision could possibly be re-examined in the event that the European Commission decide it is appropriate to initiate a formal investigation into Wallace's complaint.

In his submission, which he last month sent to the commission's director general of competition, Johannes Laitenberger, the Independent TD sought a determination on whether the tax exemptions granted to non-residents and foreign investors in Irish Reits are in breach of Europe's rules on state aid.

Wallace said he is concerned at the potential loss to the exchequer arising from the exemption granted to non-resident investors from any Irish tax, including dividend withholding tax (DWT) on profits distributed to them annually by the Reits in which they hold investments.

While he noted in his complaint that the European Commission had already approved tax exemptions for Finnish Reits in a case it considered in 2010, he has pressed for a new inquiry into the specific manner in which the Irish model operates.

And while Wallace also acknowledged that Ireland's Reit legislation is similar to Finland's, in that it requires that 85pc of all property income profits be distributed annually to shareholders, making it compliant "in theory" with the commission's 2010 state aid ruling, the TD has asked for an examination of the legislation underpinning the investment vehicles' operations here.

Citing Section 41 of the Finance Act 2013, under which Reits were introduced to the Irish market, he expressed his concern that Reits are not chargeable to either corporation tax in respect of income from their property rental business or chargeable gains accruing on disposal of assets of their property rental business.

Wallace noted in his letter that, in general, the trading profits of companies in Ireland are subject to corporation tax at 12.5pc, while the rental profits of companies are subject to corporation tax at the higher rate of 25pc. In the case of Reits, the politician informed the European Commission that their rental profits are exempt from corporation tax.

In his letter, he said: "What concerns me is the benefit accrued by non-resident investors in Reits, who may be exempt from any Irish tax, including dividend withholding tax (DWT), on annual profits distributed by a Reit, and the potential loss in tax to the Irish Exchequer.

"In my opinion, this would constitute a breach of the State Aid Guidelines."

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